Bill of Exchange
A bill of exchange is a written, unconditional order by one party to another to pay a fixed sum of money to a named person or to bearer, on demand or at a set future date. Cheques and trade drafts are bills of exchange.
Also called: draft · bank draft · trade bill · time draft
In English law the definition is in section 3 of the Bills of Exchange Act 1882. Paraphrased, a bill is an unconditional written order, signed by the person who gives it and addressed to another, to pay a certain sum of money on demand or at a fixed or determinable future time to a specified person, to that person's order, or to bearer. The drawer gives the order, the drawee is told to pay, and the payee receives. Once the drawee accepts a time bill, it becomes a negotiable claim that can be endorsed to others or sold at a discount before it falls due. A cheque is a bill drawn on a banker and payable on demand.
The instrument grew out of medieval trade. A merchant paid local coin to a banker in one city and received an order for payment in another currency, at another place, some months later. It moved value without shipping coin, and because the deal was framed as an exchange of currencies rather than a loan, the banker's return could sit inside the exchange rate and be defended against the charge of usury. Theologians argued for centuries over which exchange contracts were genuine and which were disguised loans.
Bills are still central to trade finance. A draft drawn under a letter of credit or presented through a documentary collection turns a sale on credit into a claim that an exporter can discount for cash once the buyer or its bank has accepted it.
In practice
The 1882 Act is English law, with close copies across the Commonwealth. In the United States the equivalent rules sit in Article 3 of the Uniform Commercial Code, which calls the instrument a draft. Whether a document is negotiable depends on the governing law, not on its title.
Example
An exporter ships goods on 90-day terms and draws a bill for US$200,000 on the buyer. After the buyer accepts it, the exporter's bank discounts the bill and pays roughly US$197,000 now, collecting the full US$200,000 from the buyer at maturity.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Bill of Exchange, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Bill of lading | A bill of lading is a transport document that receipts goods and can carry title to them. A bill of exchange is an order to pay money. The two often travel together in a documentary collection. |
See also
- Letter of CreditA letter of credit is a bank’s conditional undertaking to pay when the seller presents documents that comply with its stated terms. Banks examine documents rather than confirming the physical quality or performance of the goods.
- Documentary CollectionA documentary collection is a trade-payment method in which banks handle shipping or commercial documents in exchange for payment or acceptance. The banks facilitate the process but do not provide the same payment guarantee as an issuing bank under a letter of credit.
- Bill of LadingA bill of lading is a transport document issued in connection with the carriage of goods by sea. Depending on its form, it can evidence receipt of the goods, contain the carriage terms and function as a document controlling delivery.
- UsuryUsury is the charging of interest on a loan that the law or a religious tradition treats as wrongful. For most of its history it meant any agreed return on a loan of money; today it usually means interest above a legal ceiling.
- Treasury BillA Treasury bill is a short-term government debt security, usually maturing within a year, that pays no coupon. It is sold below its face value and repaid at face value, and the difference is the investor's return.